As tax negotiators, we remember receiving a call one day from a panicked local chiropractor. During our first meeting, he confided that his tax problem had actually started much earlier. In the early 1990’s, he was forced to take a second mortgage on his home to defend himself in a frivolous lawsuit. The man’s innocence was proven in court, but he fell far behind on taxes and other obligations. The years of intense financial and legal pressures took their toll on the doctor’s health and practice.
Two years later, he filed Chapter 7 bankruptcy to ease some of the pressure, but his $125,000 tax bill to the IRS was not dismissible. The doctor was so frightened, he did not file any returns or make any estimated tax payments for several years. Without warning, the IRS took every penny from his checking account, causing his mortgage and other bills to go unpaid. To make matters worse, they paid a surprise visit to his office and tried to shut down the practice.
We contacted the local IRS officer assigned to the case and managed to stop the pressure and keep the practice afloat. Because of our client’s huge monthly mortgage bills, he could not initially qualify for any reasonable settlement. It was possible that he would have to sell the house and move his family to pay his tax bill. As you can imagine, the doctor felt trapped and humiliated.
We made extra efforts to find a mortgage specialist who could refinance the doctor’s loan and cut his monthly payments in half. To pave the way, we negotiated subordinations on eleven separate IRS and state property liens. Our client is now able to make estimated tax payments and will likely save up to 90% on the huge tax bill. Fortunately, this nightmare had a happy ending, which he certainly deserved, but his long-term avoidance of the IRS created a great deal of unnecessary suffering.
When April 15th comes around, nearly 20% of the tax-paying population will owe Uncle Sam for current and back taxes with little or no ability to pay their bill. These are not bad or dishonest people. Tax troubles are triggered by poor cash flow often caused by unintentional circumstances such as a business failure, lawsuit, divorce or health problems. Chances are that you or someone you know will face a sizable tax bill, property lien, wage or bank garnishmentor even a seizure of valuable assets.
The Power of the IRS
The collection division of the Internal Revenue Service is one of the most powerful government agencies in existence today. The IRS is desperate to collect over $195 billion in back taxes, an amount large enough to cover the federal budget deficit and restore the social security trust fund. By the way, the IRS receivables figure constitutes 11.5% of the entire 1999 budget of $1.7 trillion. In some companies, IRS wage garnishments of an employee will result in termination. Countless numbers of loyal Americans feel forced to hide in the underground cash economy. It’s no wonder why the IRS is receiving so much attention from deficit-cutting politicians.
If you have been avoiding a tax problem, there is only one effective alternative. Simply stop worrying and negotiate. You will not go to jail or lose your house unless you have been convicted of tax fraud so don’t worry. There are legitimate options that can allow you to reach a settlement without causing unreasonable hardship. You may even be able to eliminate the tax bill or at least have it greatly reduced.
Option One: An Installment Agreement
Your first option in handling an IRS tax problem is a monthly payment plan called an installment agreement in which the balance is paid off over three to five years. The payment amount is based on strict IRS formulas regarding your ability to pay. At best, an installment agreement puts you into a safe harbor by stopping the collection pressure. As part of your agreement, you will make your monthly payment, plus file and pay your taxes on time. If you fail to comply, the collection pressure returns and you are back to square one. The downside is that it is an expensive loan with a current effective rate of more than 17% in interest and penalties. In addition, if the tax bill is large enough and requires three or more years to pay off, the IRS may attach a lien to your assets as protection.
Option Two: Offer In Compromise
The next option, called an “offer in compromise” or OIC is where you propose a dollar settlement with the IRS. Sometimes you can pay less than ten cents on the dollar for your settlement without undue harm to your credit report. The amount of your offer is based on your net worth plus a factor of your monthly disposable income. It is always wise to offer payment in one lump sum. The IRS also weighs factors such as your age, health, education and future earning potential. Currently, the complex OIC process takes six to nine months if handled by a competent tax professional. Thorough analysis and proper planning of your financial and tax situation should be done prior to contacting the IRS.
Upon acceptance of the OIC, you must also file returns and pay any owed taxes on time for a period of five years. Failure to do so will nullify the settlement and the old tax problem comes back in full with accrued interest and penalties. Annual tax planning is especially important during this probationary period to ensure full compliance and freedom from collection pressure.
Bankruptcy: The Final Option
Your final option is the dismissal of taxes in Chapter 7 bankruptcy. The IRS is given three years to collect the tax before you can file Chapter 7. However, if your financial profile is very strong and tax liens are attached to your assets, then the taxes may not be dismissible. An alternative route is Chapter 13 which enables you to pay back the IRS and creditors, usually over three years, while keeping assets and income protected. A bankruptcy will remain on your credit report for a period of seven to ten years. Yet with steady income and no new credit problems, it is now possible to be worthy of new credit and financing after just six months. Author’s note: The laws for personal bankruptcy face dramatic legislative change at any time.
What should do you do first?
Get advice from an experienced tax professional. After all, you are dealing with the IRS. You are extremely vulnerable when competing against a seasoned collection officer and there is no time to master an understanding of the numerous technical issues. In an effort to save money, many people undertake this process alone and find themselves in even more costly situations. This is clearly a time when you want representation to protect your best interests. A licensed CPA or enrolled agent can save you considerable amounts of money, time and hassles without costing a small fortune.
The Next Step: An Accurate Budget
As a result of the negotiating process, you can now make an honest evaluation of your finances and prepare a realistic monthly budget. Regardless of your situation, it is also important to budget your projected tax liability correctly. Chiropractors have the additional burden of staying current with their quarterly estimated tax payments. Have your tax consultant prepare a quarterly tax projection to ensure there are no surprises at the end of the year. Try to think of your estimated tax payment as an additional monthly overhead cost such as rent or phone bill. To help you to stay in compliance with the IRS, the monthly budgeting process is a simple, yet highly effective tool that can also generate savings for a more prosperous future.